How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding American Electric Power Company, Inc. (NASDAQ:AEP).
Is AEP a good stock to buy? American Electric Power Company, Inc. (NASDAQ:AEP) investors should pay attention to an increase in activity from the world's largest hedge funds in recent months. American Electric Power Company, Inc. (NASDAQ:AEP) was in 36 hedge funds' portfolios at the end of September. The all time high for this statistic is 38. Our calculations also showed that AEP isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings).
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind we're going to view the fresh hedge fund action encompassing American Electric Power Company, Inc. (NASDAQ:AEP).
Stuart Zimmer of Zimmer Partners
Do Hedge Funds Think AEP Is A Good Stock To Buy Now?
At third quarter's end, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from the previous quarter. On the other hand, there were a total of 30 hedge funds with a bullish position in AEP a year ago. With hedgies' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
The largest stake in American Electric Power Company, Inc. (NASDAQ:AEP) was held by Renaissance Technologies, which reported holding $189.8 million worth of stock at the end of September. It was followed by Zimmer Partners with a $101.6 million position. Other investors bullish on the company included Millennium Management, ExodusPoint Capital, and Adage Capital Management. In terms of the portfolio weights assigned to each position Horseman Capital Management allocated the biggest weight to American Electric Power Company, Inc. (NASDAQ:AEP), around 2.75% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, setting aside 1.6 percent of its 13F equity portfolio to AEP.
As aggregate interest increased, some big names were breaking ground themselves. TwinBeech Capital, managed by Jinghua Yan, created the most outsized position in American Electric Power Company, Inc. (NASDAQ:AEP). TwinBeech Capital had $16.7 million invested in the company at the end of the quarter. Paul Tudor Jones's Tudor Investment Corp also initiated a $4.3 million position during the quarter. The other funds with brand new AEP positions are John Horseman's Horseman Capital Management, John M. Angelo and Michael L. Gordon's Angelo Gordon & Co, and Sander Gerber's Hudson Bay Capital Management.
Let's go over hedge fund activity in other stocks similar to American Electric Power Company, Inc. (NASDAQ:AEP). We will take a look at Prudential Financial Inc (NYSE:PRU), Koninklijke Philips NV (NYSE:PHG), Paychex, Inc. (NASDAQ:PAYX), Electronic Arts Inc. (NASDAQ:EA), Constellation Brands, Inc. (NYSE:STZ), Sempra (NYSE:SRE), and Aptiv PLC (NYSE:APTV). This group of stocks' market valuations are closest to AEP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PRU,33,460021,5 PHG,11,79466,1 PAYX,34,1115089,5 EA,53,1097032,-3 STZ,53,1719109,3 SRE,23,287269,-5 APTV,44,1757047,4 Average,35.9,930719,1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.9 hedge funds with bullish positions and the average amount invested in these stocks was $931 million. That figure was $752 million in AEP's case. Electronic Arts Inc. (NASDAQ:EA) is the most popular stock in this table. On the other hand Koninklijke Philips NV (NYSE:PHG) is the least popular one with only 11 bullish hedge fund positions. American Electric Power Company, Inc. (NASDAQ:AEP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AEP is 68.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.6% in 2021 through November 30th and beat the market again by 5.6 percentage points. Unfortunately AEP wasn't nearly as popular as these 5 stocks and hedge funds that were betting on AEP were disappointed as the stock returned 0.8% since the end of September (through 11/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.